ABSTRACT

Parity theories are used  to study the "rand" / "dollar" rate. Interest rate parity results suggest that in about 20% to 26.7%  of cases, investing in  USA would have yielded higher interest returns than investing  in South Africa.   In 73.3% to 80% of cases, investing in South Africa would have yielded  more  interest returns. The PPP theory suggests  rand undervaluation relative to the dollar, thereby justifying revaluation / appreciation in all cases, while the  interest rate parity theory suggests rand undervaluation  in 73.3% to 80% of cases and overvaluation in 20% to 26.7% of cases. Cointegration tests suggest  significant (at 5% but not at 1%)  long run PPP, which is consistent with the high correlation (0.97)  between the two countries’ price levels.